Should We Be Excited About The Trends Of Returns At Byke Hospitality (NSE:BYKE)?

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Byke Hospitality (NSE:BYKE) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Byke Hospitality is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.04 = ₹90m ÷ (₹2.6b - ₹375m) (Based on the trailing twelve months to March 2020).

So, Byke Hospitality has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 7.1%.

See our latest analysis for Byke Hospitality

Historical performance is a great place to start when researching a stock so above you can see the gauge for Byke Hospitality's ROCE against it's prior returns. If you'd like to look at how Byke Hospitality has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Byke Hospitality Tell Us?

When we looked at the ROCE trend at Byke Hospitality, we didn't gain much confidence. To be more specific, ROCE has fallen from 25% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On Byke Hospitality's ROCE

In summary, we're somewhat concerned by Byke Hospitality's diminishing returns on increasing amounts of capital. We expect this has contributed to the stock plummeting 91% during the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Byke Hospitality does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are a bit concerning...

While Byke Hospitality isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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